Wake-Up Call For America

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A wake-up call for America:

A study of systemic failure in the U.S. stock markets and
suggested solutions to drive economic growth
By David Weild and Edward Kim, Senior Advisors at Grant Thornton LLP, a “Global
Six” accounting, tax and advisory firm (www.GrantThornton.com), and former members
of senior management at The NASDAQ Stock Market.
Image on front cover
Inside front cover:

There is a depression in U.S. stock markets, evidenced by the precipitous decline in the
number of publicly listed companies. This is not a global phenomenon; the United States
is seriously lagging other industrialized nations in the formation of such “listed”
companies. The culprit is changes to market structure that have inhibited economic
recovery, impaired the job market and undermined U.S. competitiveness.
The problem is dire, but solutions are attainable. We can fix market structure to support
the IPO and listed markets and to drive growth — and Congress and the SEC can lead
the way toward adding billions in tax revenue to the U.S. Treasury without costing
taxpayers a dime.
The data used in this report has not, to the best of our knowledge, been compiled previously in this form. It
comes from a number of sources, including the World Federation of Exchanges, and from direct interaction with
major stock exchanges.
© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 1

This document may be used in whole or in part with attribution.
Acknowledgements
Grant Thornton LLP recognizes the following individuals for their contributions to this study. Their
understanding of the role that properly functioning capital markets should play in lifting up the economy, and
their passion in contributing to a better America, have been invaluable.
Without their wisdom, insight and encouragement, this study would be a much lesser piece.
Mike Halloran — Former Counselor to Chairman and Deputy Chief of Staff of the SEC (Securities and
Exchange Commission) and current partner of Kirkpatrick Stockton LLP. In his role as Counselor to the
Chairman, Mike advised the Chairman on the SEC’s program to promote investor protection and capital
formation, and acted as primary legal counsel to the Chairman. He also served for seven years as General Counsel
of Bank of America.
Pascal Levensohn — Founder of Levensohn Venture Partners, Board Member of the National Venture Capital
Association and life member of the Council on Foreign Relations. Pascal has spoken broadly on threats to U.S.
innovation and competitiveness, and the implication to U.S. security interests. He was a keynote speaker at the
March 2009 Cybersecurity Applications and Technologies Conference for Homeland Security (CATCH) in
Washington, D.C.
Barry Silbert — Founder and CEO of SecondMarket, the marketplace for illiquid assets. Barry recently was
named to Treasury & Risk’s list of the “100 Most Influential People in Finance.” Matching buyers and sellers in
many non-public companies — including Facebook, Twitter and Tesla Motors — SecondMarket was named by
AlwaysOn Media as the top start-up in the entire Northeast, and by BusinessWeek as one of the “Top Fifty Tech
Startups You Should Know.”
Chuck Newhall and Dick Kramlich — Co-founders of New Enterprise Associates and “Deans” of the venture
capital business.
Steve Bochman — CEO of Wilson Sonsini, Phil Wickham — CEO of Kaufman Fellows, Steve Wesley —
Wesley Capital, and former Comptroller of California Kate Mitchell — Managing Partner of Scale Ventures and
vice chairman of the NVCA.

Index
Executive Summary
Chapter 1. The Great Depression in Listings
Chapter 2. U.S. Markets in Crisis
Chapter 3. Faltering U.S. Stock Market
Chapter 4. U.S. vs. Other Developed Nations
Chapter 5. The Great Delisting Machine
Chapter 6. Harm to the U.S. Economy
Chapter 7. Recommended Solutions
Epilogue
Appendices:
1 - Global Listing Trends Indexed to 1997

2 - Innovators
3 - Alternative Public Offerings

Executive Summary
This study explores what the authors term “The Great Depression in Listings,” the precipitous decline over the
last decade in the number of publicly listed companies in the United States. It discusses the impact of this decline
on the U.S. economy and competitiveness, offers solutions, and advocates urgent attention by the Obama
Administration, Congress and the U.S. Securities and Exchange Commission (SEC) to improve the functioning of
both public and private stock markets so they can once again support U.S. economic growth.
The study is based on a thorough analysis of global stock market listings by authors David Weild and Edward
Kim, Senior Advisors at Grant Thornton LLP, using data from a number of sources, including the World
Federation of Exchanges, and from direct interaction with major stock exchanges. The data used in this report
has not, to the best of the authors’ knowledge, been compiled previously in this form.
The study demonstrates that changes to market structure over the last 10 years have had a severe negative effect
on the number of publicly listed companies in the United States.
x The United States listed markets are in secular decline (based on declines in the number of listed
companies)
o Since 1991, the number of U.S. exchange-listed companies is down by more than 22% and down
by fully 53% when allowing for real (inflation-adjusted) GDP growth.
o Since 1997 — the peak year for U.S. listings — this number has declined by nearly 39%. (55%
when allowing for real GDP growth)
x Asia is far outpacing the United States (based on growth rates of listed companies).
o Asia’s growth in listed companies is even faster than its GDP growth rate.
o The number of listed companies in Hong Kong, a gateway to China, has nearly doubled since
1997.
x The United States’ capacity to generate new listings is well below replacement needs. Without the action
of Congress or the SEC, U.S. listed markets will continue to decline.
o 360 new listings per year are required merely to maintain a “steady state” number of listed
companies in the U.S. — a number we’ve not approached since 2000. In fact, we have averaged
fewer than 166 IPOs per year since 2001, with only 54 in 2008.
o 520 new listings per year would be required to grow the U.S. listed markets at 3% per annum –
roughly in line with GDP growth.
x Small business is impacted — 47% of all IPOs are historically neither venture capital nor private equity
funded.
x 22 million jobs may have been lost because of our broken IPO market.
x The solutions offered will help get the U.S. back on track by:
o Creating high quality jobs
o Driving economic growth
o Improving U.S. competitiveness
o Increasing the tax base and decreasing the U.S. budget deficit
o Not costing the U.S. taxpayer a dime
x These solutions are easily adopted since they:
o Create new capital markets options while preserving current options
o Expand choice for consumers and issuers
o Preserve SEC oversight and disclosure, including Sarbanes Oxley, in the public market solution.
o Reserve private market participation to only “qualified” investors thus protecting those investors
that need protection.
x These solutions would refocus a significant portion of Wall Street on rebuilding the U.S. economy.

Today, capital formation in the U.S. is on life support. Small IPOs from all sources – venture capital, private
equity and private enterprise - are all nearly extinct and have been for a decade. Within the venture capital
universe, the average time from first venture investment to IPO has more than doubled. Meanwhile, stock market
volatility, a measure of risk, has broken all records.1 Retirement accounts have been laid to waste. The opportunity
for millions of potential jobs has been lost, while some in the generation nearing or in retirement are now forced
to postpone or come out of retirement.2
The lack of new listings is not a problem that is narrowly confined. Rather, it is a severe dysfunction that affects
the macro economy of the U.S. — with grave consequences for current and future generations.
The authors argue that the root cause of “The Great Depression in Listings” is not Sarbanes-Oxley, as some will
suggest. Rather, it is what they call “The Great Delisting Machine,” an array of regulatory changes that were
meant to advance low-cost trading but have had the unintended consequence of stripping economic support for
the value components (quality sell-side research, capital commitment and sales) that are needed to support
markets, especially for smaller capitalization companies.
Underappreciated a decade ago is the fact that higher transaction costs actually subsidized services that supported
investors, while lower transaction costs have accommodated trading interests and fueled the growth of “day
traders,” “high-frequency trading,” that have spawned the age of “Casino Capitalism.” The result — investors,
issuers and the economy have all been harmed.
The authors make recommendations for improvements to both public and private stock markets in the United
States so those markets once again are capable of supporting capital formation and economic growth. The
authors urge Congress and the SEC to hold immediate hearings to understand why the U.S. markets have shed
listings at a faster rate than any other developed market, and to pursue solutions that, together with thoughtful
oversight, will advance the U.S. economy, grow jobs, better protect consumers and reduce the deficit — all
without requiring major expenditures by the U.S. government:
x Alternative Public Market Segment: A public market solution that provides an economic model to
support the “value components” (research, sales and capital commitment) in the marketplace. This
1
See CBOE Volatility Index in Exhibit 26 and the period in late 2008 where Credit Crisis volatility was seen to be twice
that of the Dot-Com Bubble and subsequent aftermath. Have computer automation and low-cost execution added to
systemic risk and the destruction of portfolio values experienced during the Credit Crisis?
2
Healy, Jack, “Back Into the Deep End: Cautiously, Investors Look to Stocks to Rebuild 401(k)’s,” New York Times,
September 11, 2009, p. B1. The caption of the photo accompanying the article reads, “Joe Mancini of Fredericksburg,
VA, has losses on his portfolio of around 30% and has had to put off his retirement.”

solution requires a market segment that leverages a fixed spread and commission structure. It would
come under traditional SEC registration and reporting (e.g., annual and quarterly reporting, Sarbanes-
Oxley compliance, etc.) oversight.
x Enhancements to the Private Market: A private market solution that enables the creation of a qualified
investor marketplace consisting of both institutional investors and large accredited investors that allows
issuers to defer many of the costs associated with becoming a public company before they are ready for
an IPO. This market would serve as an important bridge to an IPO.

1. The Great Depression in Listings
The United States, when compared to other developed nations, has fallen seriously behind in its number of listed3
companies. It has been in free fall since 1996/1997. Specifically, the number of exchange-listed companies in the
United States has declined 22.2% since 1991 (see Exhibit 1). This understates the problem, however, because the
economy has grown significantly since then. A larger economy logically should support more, not fewer, public
companies. Adjusting for real GDP growth, the true decline in the number of listed companies on U.S stock
markets is 52.8% since 19914 (a measure of listed company “opportunity cost”).
The existence of 5,401 listed companies (excluding funds) in the United States as of December 31, 2008, suggests
that — due to changes in market structure — the United States may have failed to benefit from the economic
fruits of nearly 11,000 publicly listed companies.
3
A “listed” company in the United States is an operating company whose primary listing is on The New York Stock
Exchange, the American Stock Exchange (acquired by the NYSE in October 2008), or The NASDAQ Stock Market.
Companies whose shares are quoted on the Over-the-Counter Bulletin Board (OTCBB) or Pink Sheets are not
considered “listed.” The data in this study excludes listed funds.
4
Real inflation-adjusted GDP data from U.S. Department of Agriculture, Economic Research Service, based in 2005
US$.

We call this decline “The Great Depression in Listings,” and we see no sign of its abating.5, 6 The root cause of
The Great Depression in Listings is not Sarbanes-Oxley, as some will suggest. Rather, it is what we call “The
Great Delisting Machine,” an array of regulatory changes that were meant to advance low-cost trading, but have
had the unintended consequence of stripping economic support for the value components that are needed to
support markets, especially for smaller capitalization companies. We believe that this decline has cost the U.S.
economy many millions of jobs through at least five phenomena:
x value destruction — an accelerated rate of delisting public companies,
x loss of access to equity investment capital — a lowered rate of new listings,
x lowered rate of reinvestment — cash realized from sale of shares and reinvested,
x decreased investment capital allocations by ERISA accounts to investment strategies that target smaller
companies, and
x diminished access to debt capital (including bank lines) which may first require access to equity capital to
improve creditworthiness — affects their ability to reinvest and fuel expansion.
If market structure is failing to support the micromarket7 for individual listed companies, how can it serve
investors? How can it be efficient? How can it facilitate capital formation?
It can’t.
Note to Design: Repeat as call out copy
The decline in the number of U.S. listed companies has cost our economy millions of potential jobs.
The Great Depression in Listings has profound negative economic implications and deserves immediate action
from the Administration, Congress, and the U.S. Securities and Exchange Commission (“SEC”). This crisis
contributes to greater U.S. budget deficits. With increased access to equity capital, and market structure that better
supports issuers, we would see increased productivity, job growth and capital gains, which drive tax revenue for
the U.S. Treasury. Unlike deficit spending, fixing market structure offers material support to U.S. economic
growth without adding to budget deficits.
We issue a “call to action” at the end of this report, offering recommendations for restoring both public and
private stock markets in the United States so once again they are capable of supporting capital formation and
economic growth.
“Bespoke” (Limited edition) markets are more costly and labor intensive than “Wholesale” (Mass
production) markets. The economic model created by current regulation does not support the necessary
ecosystem (e.g., equity research, capital commitment and sales support) to support small capitalization
stocks.
5
In 2009 in the wake of the Credit Crisis and decline in share prices, the NYSE and NASDAQ instituted a moratorium
on delisting companies that failed to maintain the $1 per share minimum price. In addition, the NYSE moved to
permanently reduce its minimum market capitalization standards from $25 million to $15 million. Press reports have
recently concluded that once the moratorium is lifted, there may be as many as 350 additional companies delisted — a
further decline of 6.5% in the number of listings — despite the approximately 50% increase in major stock market
indices off their recent lows.
6
See NYSE Press Release dated February 26, 2009 entitled “NYSE to Extend, Expand Temporary Easing of Continued-
Listing Standards, Extends Temporary Lowering of Average Global Market Cap. Standard to $15mln to June 30,
Temporarily Suspends its $1 Minimum Price Requirement.” (http://www.nyse.com/press/1235647172819.html). See
also NASDAQ filing on July 13, 2009 of Form 19b-4 with the SEC for their continuation of suspension request of the
bid price maintenance rules (http://www.nasdaq.net/publicpages/assets/SR-NASDAQ-2009-069.pdf)
7
A “micromarket” is the market for an individual security. In the equities markets, the underlying micromarket for a
common stock will vary greatly as a function of such factors as: size (market cap and float), industry, index inclusions,
ETF inclusions, ownership structure (retail vs. institutional; hedge fund vs. mutual funds, etc.), database exposure (e.g.,
First Call, Reuters Multex, and coverage by sell- and increasingly buy-side analysts.

2. U.S. Markets in Crisis
A decade ago U.S. stock markets were the envy of markets across the globe. President Jiang Zemin of China
called NASDAQ “the crown jewel of all that is great about America.”8 The Ibbotson study of stock market
returns concluded that, for nearly 100 years, someone holding a diverse portfolio of U.S. stocks for any decade
earned higher returns than someone holding a portfolio of bonds9.
It was a time when the U.S. stock market worked … when bond ratings were trusted … when banks competed to
lend money. Not so anymore.
Declines in the number of U.S. listed companies are much greater than those of other developed countries. The
small IPO, once the mainstay of the new issues market, is now nearly extinct.10 The venture capital industry is
threatened as the number of venture-funded IPOs is at an all-time low, and the average time from first venture
investment to IPO has more than doubled.11 Market volatility, a measure of risk, has broken all records12.
Retirement accounts have been laid to waste. Some in the generation nearing or in retirement are now forced to
postpone or come out of retirement13.
Such conditions suggest a failing U.S. stock market that may not
x adequately serve investors (investors may be losing money14 unnecessarily),
x maintain efficient markets (share prices more often detaching from fundamentals), and
x facilitate capital formation (the IPO market is crippled).15
8
Cox, J., “U.S. Success Draws Envy,” USA Today, August 3, 2000.
9
Ibbotson & Associates, “Stocks, Bonds, Bills and Inflation 2000 Yearbook”
10
“Why are IPOs in the ICU?” by David Weild and Edward Kim, published by Grant Thornton LLP.
11
According to the National Venture Capital Association’s “NVCA 4-Pillar Plan to Restore Liquidity in the U.S.
Venture Capital Industry,” dated April 29/30 2009 and authored by Dixon Doll and Mark Heesen, the median age of a
venture-funded IPO in 1998 was 4.5 years, and this “gestation period” had elongated to 9.6 years by 2008. See also Dow
Jones VentureSource.
12
See CBOE Volatility Index in Exhibit 26 and the period in late 2008 where Credit Crisis volatility was seen to be
twice that of the Dot-Com Bubble and subsequent aftermath. Have computer automation and low-cost execution added
to systemic risk and the destruction of portfolio values experienced during the Credit Crisis?
13
Healy, Jack, “Back Into the Deep End: Cautiously, Investors Look to Stocks to Rebuild 401(k)’s”, New York Times,
September 11, 2009, p. B. The caption of the photo accompanying the article reads, “Joe Mancini of Fredericksburg, Va,
has losses on his portfolio of around 30% and has had to put off his retirement.”
14
The rate of delistings of small companies continues to be high and there has been an expansion in use of forms of
finance, especially PIPEs (private investments in public equity), that can be dilutive and exclude retail investor
participation. In addition, institutional portfolio managers have commented to us that small and microcap stocks may
trade at larger discounts than they once did due in part to insufficient research attention, both by institutional investors
and Wall Street, on small capitalization and micro capitalization stocks.
15
Paraphrased from the mission statement of the SEC which can be found at http://www.sec.gov/about/whatwedo.shtml
and reads, “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly,
and efficient markets, and facilitate capital formation.”

Global markets
Exhibits 2 and 3 document the absolute and real GDP-weighted percent change in the number of listings for
markets including:
United States Japan

United Kingdom Hong Kong
Germany Australia
Italy Canada
Charts are indexed to 100 starting in 1997 — the peak of U.S. listings — to illustrate how the world has changed
during the period leading up to and since that year.
Prior to 1997, the United States was performing in line with other developed markets. Subsequent to 1997, the
United States demonstrates a precipitous decline in population of listed companies relative to other developed
markets. The decline for the United States is particularly dramatic when weighted for changes in real GDP
(Exhibit 3) over this time period (1991 to 2008).

Repeat text as call out

The degradation of the listed markets in the United States is due to structural changes that have
disproportionately harmed smaller capitalization companies.

Global market indices
Exhibit 4 examines the possibility that the U.S. listing decline may be attributable to poor stock price performance
specific to the United States. We compare the stock price indices of eight developed markets and observe that
U.S. stock prices were performing in the middle of the range of these developed countries. As a result of that
observation, we believe that the degradation of the listed markets in the United States is due to the series of
regulatory changes that have induced structural changes to the market. Further, we believe that those structural
changes have disproportionately harmed smaller capitalization companies (the source of most delistings) and
destroyed the small IPO market (the source of most initial listings).
S&P 500 (United States) Nikkei 225 (Japan)

FTSE 100 (United Kingdom) Hang Seng (Hong Kong)
DAX (Germany) All Ordinaries (Australia)
MBTEL (Italy) TSX (Canada)
There is no correlation between the decline in listings in the U.S. and U.S. market performance relative to other
countries. Note that these indices generally are made up of large capitalization stocks and are market weighted.
Clearly, while market structure in the United States may be working for large capitalization companies, it is
systematically degrading the value of small capitalization companies.

3. Faltering U.S. Stock Market
The number of listings decline on the U.S. exchanges
All listed markets in the United States have experienced a listings decline. If we consolidate the numbers for all
three major exchanges, we determine that The Great Depression in Listings began sometime around 1997 —
before the height of the Dot-Com Bubble in 1999 and fully five years before the implementation of the Sarbanes-
Oxley Act of 2002. Of the three markets (AMEX, NASDAQ and NYSE), AMEX listed the smallest companies
on average, followed by NASDAQ, and then the NYSE. The number of listings on AMEX peaked in 1993
(Exhibit 5), whereas the number of NASDAQ listings peaked in 1996 (Exhibit 6), and the NYSE listings number
peaked in 199916 (Exhibit 7). Our discussions with regulators and operators of the exchanges (who were active
during this period) indicate that the exodus from AMEX was in part precipitated by the solicitation of listings
(takeaways) by NASDAQ and the NYSE. The NYSE’s peak in listings occurred last due in part to the fact that it
relaxed its listing standards during the Dot-Com Bubble in order to compete more effectively against NASDAQ.
As a result, it attracted a number of IPO listings that previously may have migrated to other markets. The NYSE
also was highly successful in attracting switches from NASDAQ by companies seeking to position themselves
more as traditional “bricks and mortar” entities versus simply as the “clicks and bricks” of the Dot-Com Bubble.
(Note to designer, can you put the three charts in one column, first Amex, then NASDAQ and then NYSE, with
the copy on the side.)
Call out text:

Market structure changes began to erode support for small cap stocks and eventually worked its way up to
damage the support for larger companies.
The data in Exhibits 5 through 7 demonstrate that the decline in listings appears to have begun at the exchange
with the smallest listed companies, AMEX, followed then by NASDAQ, and ending at the exchange with the
largest listed companies, NYSE. This observation is consistent with the thesis that market structure changes
began to erode support for small cap stocks. It is also consistent with the thesis that the combined weight of a
series of changes eventually may work its way up to damage the support for larger companies.
16
The NYSE delayed the onset of its listings decline by modifying its listing standards in June of 1998 to better compete
for NASDAQ listings. See Wall Street Journal article dated June 5, 1998 and entitled, “The Big Board Overhauls
Standards for Stock Listings” plus Philadelphia Enquirer p. D3 appearing June 6, 1998, entitled, “NYSE Seeks to
Change Rules, Partly to Lure NASDAQ Firms.”

Both the AMEX (Exhibit 5) and NASDAQ (Exhibit 6) composite stock indices peaked well after the exchanges’
listings declines were fully underway. Clearly, The Great Depression in Listings is not caused by a bear market.
We have had bull markets since 1997 in which the pick-up in IPO activity has been inadequate to cover the higher
delisting rate at U.S. stock markets (this, despite the fact that the exchanges have relaxed “maintenance standards”
to stem the tide in delistings).


U.S. Markets Fall below a Steady State
We define a “steady state” as the equilibrium level at which the stock exchanges maintain the same number of
listings from year to year. To exemplify:
In 2008, while there were 54 IPOs,17 there were 303 net listings lost on the NYSE (including AMEX)
and NASDAQ.18 To maintain the same number of listings from the prior year (steady state), 303
additional new listings — a total of 357 new listings19 (mostly IPOs) — would have been required. The
steady state, or equilibrium level, has averaged 360 new listings per year since 2004 (Exhibit 8).20
We have calculated relatively similar “replacement” needs for both the NYSE and NASDAQ to reach steady state
in numbers of listings — a surprising result in that the NYSE’s listing standards are perceptibly higher. We
understood that outcome, however, when we considered that the NYSE acquired AMEX and Arca, thus actively
expanding its “total addressable market” of IPOs by broadening its listing standards. Today, ceteris paribus, the
NYSE would need at least 171 IPOs (Exhibit 9) per year to avoid further declines, while NASDAQ would require
189 IPOs (Exhibit 10). Under current market structure, we see nothing to prevent continued shrinkage of the
United States equities markets by at least 300 companies in 2009 and by at least 100 companies per year for the
next decade.
17
Source: Dealogic. Number of IPOs excluding closed-end funds.
18
Source: World Federation of Exchanges, NYSE Euronext, NASDAQ Stock Market. Includes NYSE (main board,
Arca and Amex) and NASDAQ stock listings. Excludes closed-end funds.
19
“New listings” are derived from several sources including: (1) IPOs (by far the largest segment), (2) listings that move
from one exchange to another (typically a zero sum game within the United States), (3) from spinouts of larger
corporations (although many of these also include a capital raise and show up as IPOs) and (4) from public companies
that list from the bulletin board or over-the-counter markets. The overwhelming majority of “new listings” have
historically come from the IPO market. “Delistings” also come from a number of sources including, (1) Forced delisting
for failure to maintain listing standards (such as the $1 minimum price rule) and (2) Mergers and acquisitions.
20
The reader should note that the “Steady state” number of new listings will vary with the size of the market. A larger
market requires more listings every year to maintain equilibrium. A smaller market requires fewer listings. For example,
in the most extreme case where the size of the listed market was 0 (zero) listings, zero new listings would be required to
maintain the size of the market at zero.

Repeat as call out text:

Under current market structure, we see nothing to prevent continued shrinkage of the United States equities
markets by at least 300 companies in 2009 and by at least 100 companies per year for the next decade.


4. U.S. vs. Other Developed Nations
The United States is undergoing a secular decline in its population of listed companies — a decline that decidedly
is worse than in any other developed country for which reliable data was available.
This is at once a wake-up call for the United States and a cautionary tale to foreign stock markets that the U.S.
model of high speed, low-cost trading and automation may undermine the public market feeder system (small
IPOs) that supports economic growth and the growth of stock markets.
Call out
Listings in the U.S. peaked in 1997 and have been in steady decline each year thereafter. In absolute terms, U.S.
listings are down 38.8% since 1997, or 54.5% on a GDP-adjusted basis.
The following provides a summary for North America, Europe and Asia.
(Note to designer, put each continent in a box, may need their own page.)

North America
Exhibit 12 shows that among the study group, the United States, since 1991, has posted the worst net decline —
down 22.2% — in its total population of listed companies. In effect, we gave back the entire listing boom21 of the
Dot-Com Bubble and more. Considering that the U.S. economy has grown significantly since 1991 and, thus, the
population of listed companies also should have grown, we calculate a 52.8% decline in real (inflation adjusted)
GDP-weighted listings. The case can be made, then, that had market structure remained constant since 1991, the
United States listed markets should have increased by approximately 5,500 operating companies, yielding twice
the total number it does currently!
Exhibit 12 shows that listings in the U.S. peaked in 1997 and have been in steady decline each year thereafter. In
absolute terms, U.S. listings are down 38.8% since 1997, or 54.5% on a GDP-adjusted basis. (See Appendix 1 for
charts indexed to 1997 peak.)
Compare this to Canada (Exhibit 13), which experienced substantial absolute growth of 38% in the number of
listings22 from 1991 to 2008 and of 10.6% since 1997.
21
See “Why are IPOs in the ICU?” by David Weild and Edward Kim, November 2008
22
Please note that while the Toronto Stock Exchange acquired the Canadian Venture Exchange in 2001 which was
then renamed the TSX Venture Exchange, these listings numbers and trends do not include companies listed on
the TSX Venture Exchange.

Europe
The number of European listings has grown since 1991, presenting a sharp contrast to the declines experienced in
the United States. Our sample includes data from the London Stock Exchange (LSE), Deutsche Börse and Borsa
Italiana, which merged recently with the LSE. (We do not present data from other Western European countries
because merger activity in Spain, and the consolidations of exchanges in France, Belgium and the Netherlands to
Euronext have hampered our attempts to assemble reliable historical corporate listings data for those countries.)
The LSE (Exhibit 14) shows 10.3% absolute growth in the number of listed companies since 1991, though it
shows a 29% decline on a GDP weighted basis. This contrasts markedly with the United States, where the decline
since 1991 was 22% in absolute terms and 55% when weighted for changes to real GDP. The LSE has grown
since 1997 by 15.4%, which is a decline of 13.4% when adjusted for GDP. Our LSE numbers include the
Alternative Investment Market (AIM), and while there is likely some benefit from companies listing in London
that historically (prior to Sarbanes-Oxley) might have preferred the United States, our review (see U.S. vs. UK
discussion under “North America”) suggests that the UK market was much closer to maximizing its listing
potential than other markets.
The Borsa Italiana sustained a steady growth trajectory since 1991 — up 12.4% — and accelerated up 25.5%
since 1997 (Exhibit 15). Borsa Italiana was acquired by the LSE in 2007, but listings data is still available
separately. At the end of 2008, Borsa Italiana launched AIM Italia with the help of the LSE. As a result, and
assuming this market takes root, we expect to see continued accelerated growth in the number of listings (and the
economy) in Italy over the next decade.
Our Deutsche Börse data sample goes back only to 1997 (during the Dot-Com Bubble), yet despite being
indexed to 1997 at an expected already-elevated base, Deutsche Börse’s listings base posted growth in both
absolute (up 35.7%) and real-GDP adjusted terms (up 14.6%). (See Exhibit 16.) Interestingly, the Deutsche Börse
opened and closed the Neuer Markt (the German entry to compete for earlier staged listings against LSE’s AIM)
over this period. Even with the loss of that lower-standard market, it was able to end the decade with gains.


Asia
Listed markets in Asia are growing everywhere. We confined our analysis to more developed markets (Tokyo,
Australia and Hong Kong). We expected to see a lack of growth in listings on the Tokyo Stock Exchange, and
instead saw growth in the number of listings that would be the envy of markets here in the United States —
growth in both absolute numbers, up 35.5%, and adjusted for real GDP, up 11.3% (Exhibit 17). Growth since
1997 also has been strong at 28.2%, or 14.1% adjusted. Not resting on its laurels, The Tokyo Stock Exchange
Group has partnered with the London Stock Exchange to launch Tokyo AIM, “a new market for growing
companies.” Tokyo AIM received its license to operate from the Japanese Financial Services Agency on May 29,
2009, so we expect the aggregate number of listings in Tokyo to see accelerated growth.
The number of listings on the Hong Kong Stock Exchange has more than tripled since 1991 (up 253.2%), and
growth in listings during this period has even exceeded real growth in GDP by more than two-thirds (up 67%).
(Exhibit 18.) Growth since 1997 has been a robust 91.6%, or 22.7% adjusted. Much of this growth is attributable
to the large number of state sponsored enterprises that would never have listed on an exchange outside of Hong
Kong or China. The Australian Stock Exchange has experienced strong absolute growth (up 99.9%), but modest
growth when weighted for real growth in GDP (up 9.4%) (Exhibit 19) — that market has grown 64.8% since
1997, or 14.4% adjusted.
Undoubtedly, these governments, markets and their regulators are pursuing strategies that are intended to support
economic growth.


5. The Great Delisting Machine
The United States has been engaged in a longstanding experiment to cut commission and trading costs. What is
lacking in this process is the understanding that higher transaction costs actually subsidized services that
supported investors, while lower transaction costs accommodate trading interests and enable the growth of “day
traders,” “high-frequency trading,” and the age of “Casino Capitalism.”
The Great Depression in Listings was caused by a confluence of technological, legislative and regulatory events
— termed The Great Delisting Machine — that started in 1996, before the 1997 peak year for U.S. listings. We
believe cost-cutting advocates have gone overboard in a misguided attempt to benefit investors. The result —
investors, issuers and the economy have all been harmed.
The Great Delisting Machine
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The Great Delisting Machine Timeline
The Root Cause - Two phenomena are the root cause of The Great Depression in Listings that began in 1997:23
x The advent of Online Brokerage (1996), which disintermediated the retail broker who bought and sold
small cap stocks. Retail salesmen, once the mainstay story-telling engine driving small cap stocks, had
been chased from the business by the introduction of unbundled trading. (Unbundled trades separated
commissions into discrete payments for research and trade execution, and online brokerage.)
x The advent of new Order Handling Rules (1997) by which ECNs were required to link with a
registered exchange or the NASD, allowing exchange or NASD members to execute their trades against
ECN orders inside the public bid and offer, thus eroding the economics that enabled capital
commitment, sales and research support.
Compounding Factors - A number of other factors compounded the IPO Crisis and listings market decline, but
each came after 1997, and thus did not precipitate The Great Depression in Listings:
x Decimalization (2001) — While the conversion of trading spreads from quarter and eighth fractions to
pennies may not have triggered the decline, it certainly exacerbated it by ensuring that the U.S. listings
market would not offer adequate trading spread to compensate firms to provide the market making, sales
and research support.
x The passage of Sarbanes-Oxley (2002) — Given its timing well after the onset of the listings decline,
SOX clearly is not the precipitating factor in the Great Depression in Listings and the IPO Crisis.
However, public companies have incurred significant incremental costs in establishing, testing and
certifying internal controls due to its passage and implementation. These costs likely have fueled some
delistings and served to dissuade some companies from going public. However, since its passage, SOX
compliance costs have declined and should continue to decline.24
x The Global Research Settlement (2003) — Given that small capitalization stock coverage became
unprofitable, the separation of research from banking eliminated banking compensation for analysts that
was the last revenue source used to offset the opportunity cost analysts incur by covering fewer large
capitalization stocks. Large capitalizations stocks are by definition, held by many times more investors
than small capitalization stocks. More investors per stock leads to greater demand and reputation for the
23
See “Why are IPOs in the ICU?” by David Weild and Edward Kim, November 2008
24
See Financial Executives International (FEI) survey News Release dated April 30, 2008, which states, “Companies
reported requiring an average of 11,100 people hours internally to comply with Section 404 in 2007, representing a
decrease of 8.6% from the previous year” and “Auditor attestation fees paid by accelerated filers…representing a 5.4%
decrease from 2006.”

analyst. Thus, the lost of investment banking-derived compensation for analysts contributed to declines
in small capitalization stock coverage, IPOs and new listings.
As these events took shape, the managements of several investment banks that had catered to small public
companies and specialized in IPOs anticipated the erosion of their economic model. They quickly sold to
commercial banks, pending passage in 1999 of Gramm-Leach-Bliley, which ended the separation between
commercial and investment banking.
Side bar:
The Last of the Four Horsemen (investment banks that catered to emerging growth companies)
In June 1997, Robertson Stephens was sold to BankAmerica for $540 million. The combined firm would operate
as BancAmerica Robertson Stephens for 11 months. That same year, NationsBank Corporation acquired
Montgomery Securities, and Alex. Brown & Sons was bought by Bankers Trust. By the end of 1997, three of the
Four Horsemen were absorbed into commercial banks at precisely the time that the number of NASDAQ listed
companies began a secular decline. The last of the Four Horsemen, Hambrecht & Quist, was sold to Chase
Manhattan Bank in September 1999.
David Weild recalls a meeting of NASDAQ’s operating committee when he was its Vice Chairman:
“It was in the immediate aftermath of the Internet bubble, and NASDAQ’s issuer services group had
been advocating lower listing maintenance standards to save hundreds, maybe thousands, of public
companies from certain delisting. We suspected that certain hedge funds were naked shorting stocks to
depress their price below the minimum price they needed to maintain to stay listed. It was clear to us that
the transition to penny spread increments had stripped market makers of their ability to commit capital
and remarket shares, thus eliminating sorely needed support.”
Products of the Great Delisting Machine

In an epic case of unintended consequences, one-size-fits-all market structure added liquidity to large cap stocks,
but ushered in an age of “Casino Capitalism” and created a black hole for small cap listed companies. In addition,
we find ourselves in a market environment with structural impediments that block public companies from going
private, a lack of research support, and greater systemic risk and volatility.
Casino Capitalism
Call out
The results of low transaction-cost Casino Capitalism are that short-term, high-frequency traders are squeezing
out long-term investors, the listed market for public companies is in decline, and this decline is taking the U.S.
economy with it.
Issuer transparency through SEC-mandated disclosure is the very foundation of investor confidence.
Unfortunately, transparency does not extend to all corners of the public markets. Different standards apply to
brokerage firms and ’40 Act Companies, and hedge funds have no compliance standards. With the onslaught of
new products and venues, opaqueness and risk have amplified for citizens, and short-term, high-frequency traders
have replaced long-term, quality investors for companies — all through the proliferation of:
x Black pools (opaque, anonymous trade execution venues used by institutions away from traditional
exchanges) — Approximately 40 black pools are said to be operating in the United States.
x Hedge funds — An estimated 8,800 hedge funds are responsible for 30% of stock trading volume in the
United States,25 yet they are not required to disclose anything, including trading activity or use of leverage.
25
“Testimony Concerning the Regulation of Hedge Funds” by SEC Chairman Christopher Cox, July 25, 2006 before the
Senate Committee on Banking, Housing and Urban Affairs. see
http://www.sec.gov/news/testimony/2006/ts072506cc.htm.

x Naked shorts — In June 2008, a report by JP Morgan26 indicated that 22 billion shares of stock had “failed
to deliver.” Most of these shares were likely the work of “naked short” sellers. The SEC has focused
considerable attention on bringing harmful short-selling activity under control since the Credit Crisis
accelerated in the fall of 2008.
x Predatory shorts — Short sellers that target vulnerable new-issue activity, they may short ahead of a
marketed follow-on stock offering and cover in the open market after trading (legal), or they may trade on
inside information and short ahead of PIPEs and registered direct offerings (illegal). They may take short
positions in companies and then disclose false negative publicity about them, aiming to cover their positions at
a profit (illegal). These behaviors cost issuers hundreds of millions, if not billions, of dollars in lost proceeds
every year. To date, the SEC has not vigorously pursued these short-sellers.
x High-frequency trading firms — These firms generate order flow that is computer driven and not
supported by individuals making fundamental buy and sell decisions (Exhibit 25). They include proprietary
trading firms (e.g., GETCO and Tradebot), statistical arbitrage hedge funds (e.g., Millennium and DE Shaw),
and automated market makers (e.g., Citadel, Goldman Sachs and Knight Securities). The SEC is currently
examining the impact of high-frequency trading.
x OTC derivatives and credit-default swaps — These products may depend on offsetting transactions in
traditional equity, debt and options markets. Systemic risk elevates significantly due to lack of a single
regulator and central clearing party to oversee all related-market transactions.
x Credit surrogates — When security complexity made it impossible for investors to conduct their own
analysis, they relied on ratings from ratings agencies and insurers. The ratings proved to be overly optimistic
— especially those of CDOs of ABSs and CDOs of CDOs (CDO-squared) whose complexity exceeded the
analytical and risk management capabilities of the most sophisticated market participants.
26
JP Morgan Report Dated September 19, 2008, “SEC restrictions will curb some short sales”

Side Bar
The SEC lost a celebrated court case in Goldstein v SEC in which the SEC previously had tried to assert over
private hedge funds jurisdiction of the Investment Advisors Act of 1940 over private hedge funds.27 In 2006, in
the wake of this loss, then-SEC Chairman Christopher Cox testified before the Senate Banking Committee about
the burgeoning risks posed by the growth in both credit default swaps and hedge funds.28 While The
Administration and some on Capitol Hill are legislating for Investment Advisor Act registration. is now being
sought in legislation by The Administration and some on Capitol Hill thatThis act does not provide for
affirmation regulation, such as control of leverage and trading practices or the disclosure of counterparty names
and positions.
Hotel California (for small capitalization companies)
Call out
The small and micro cap markets have in many ways become a Hotel California – companies check in but they
can’t check out (except through delisting, bankruptcy or acquisition).
We believe stock valuations in the microcap segment would be depressed systemically relative to larger
capitalization segments of the stock market. This niche would thus lend itself to “going private transactions”
where control could be purchased at attractive prices.
Professionals working in the microcap (sub-$250 million market cap) niche confirmed29 that microcap valuations
are often “depressed” and significantly lower than even private market valuations, and that the opportunity to
eliminate public company expenses made these depressed microcap companies extreme “bargains” on paper.
They also confirmed that serious structural impediments in this market thwart genuine efforts to take these
companies private (and thus begin the clean-up of what has become a comparable valuation30 nightmare for other
companies considering an IPO).
In larger capitalization segments of the market, arbitrageurs accumulate stock from shareholders at or near the
tender price of a proposed acquisition. These arbitrageurs do not have long-term investment interest and thus will
vote for such a transaction. Arbitrage activity, therefore, is seen as a key enabler to a successful “going private”
transaction. However, the professional arbitrage funds generally do not participate in sub-$250 million public-to-
private transactions because of their small size (these transactions are not large enough to add significant return to
their portfolios) and the risk perceived due to the lower liquidity in the shares of smaller companies.
Thus, the small and micro cap markets have in many ways become a “Hotel California” — companies check in
but they can’t check out by going private (except through delisting, bankruptcy or acquisition), providing yet
another disincentive to going public.
The “Brain Drain” of Equity Research

As the stock market’s economic model (discussed herein) changed and high-frequency trading exploded, the
Great Delisting Machine caused the “brain drain”31 in equity research. The best sell-side analysts fled to the buy-
27
Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006)
28
“Testimony Concerning the Regulation of Hedge Funds” by SEC Chairman Christopher Cox, July 25, 2006, before the
Senate Committee on Banking, Housing and Urban Affairs. see
http://www.sec.gov/news/testimony/2006/ts072506cc.htm.
29
Discussions held with portfolio managers in March and April 2009.
30
Initial Public Offerings typically are marketed and priced at a valuation discount to “comparable” companies. Thus,
when small and microcap stocks trade at discounted valuations to companies in the private market (which is usually the
case), the low-priced microcaps — serving as comparables for pricing purposes — seriously dilute IPO prices.
31
In 2006 Steven Buell, then-Director of the Research Committee for the SIA (Securities Industry Association, known
currently as SIFMA), used the term “brain drain” to describe this phenomenon.

side in search of better compensation. Today, institutional investors consider Wall Street research analysts to be
far inferior to their own research analysts. High-quality investment research — widely available to investors at one
time — has deteriorated significantly, and as a result, smaller, harder-to-analyze companies (e.g., tech, biotech)
have suffered disproportionately.
This cliché is particularly apt for small capitalization stocks: “Stocks are sold, they are not bought.” As the
industry sheds “stock sellers” (retail stockbrokers, research analysts and institutional sales-traders), it comes as no
surprise that the markets are destroying, rather than adding, value. The market structure that might work well for
a large cap stock, simultaneously causes erosion in the value of small-cap stocks.
One of this study’s reviewers asked, “If investors would be better off with retail brokers in the middle, why
wouldn’t the free market still provide a mechanism for them? It seems that a retail salesman, doing his homework
and creating value for his clients, would have a sustainable business.”
Unfortunately, during the Dot-Com Bubble, online brokerage shattered the integrity of the high-touch retail
brokerage model in much the same way that Napster shattered the pricing model for the music industry.
Individual investors would take the advice of retail brokers, but not pay for it — instead, they would execute their
recommendations through a discount online brokerage firm. In this way, online brokerage destroyed the
economic model for the broker-intermediated retail investment business. While Intel and General Electric —
because of their size — never lack attention, most small stocks need research, sales and capital support to sustain
reasonable valuations and liquidity.
An Increasingly Hostile Environment

The Great Delisting Machine has created a market environment unfavorable to small public companies and
capital formation. It may have exacerbated volatility and separated many stocks from their fundamental
investment value. Without an economic model to compensate firms for providing research, sales and trading
support, many small cap stocks are left without the capital commitment required to ensure a liquid and orderly
market. So, we decided to review a number of classic market quality measures including volatility/risk and
liquidity trends and offer some observations.
Volatility and thus Risk have Increased

The credit crisis ushered in record-breaking levels of volatility (see Exhibit 26), a measure of the market’s
assessment of all risks combined (risk to companies, within industries, within markets — thus, systemic risk).
Volatility and thus risk, peaked at roughly twice the previous peaks which occurred during the Dot Com Bubble
and the Long-Term Capital Management crisis of 1998
As you will recall, in 1998 Long Term Capital Management, a highly leveraged hedge fund — $125 billion
borrowed on less than $5 billion in equity — nearly collapsed the U.S. system. The Federal Reserve organized a
rescue that included many of the investment banks. One might think that Congress would have acted years ago to
put the Fed and the SEC in a position to better control for these risks.
The question that is troubling many is, “Do extreme low-cost automated (algorithmic) markets increase systemic
risk?” We believe they do increase systemic risk.

Volatility May have Outpaced Liquidity32

A great misconception is that liquidity in the stock market is significantly higher because share volumes are higher.
While it is clear that stock trading volumes have ballooned over the last decade, liquidity may not have increased,
especially for small capitalization stocks, because volatility may have increased even faster than share volumes. In
fact, volatility in the S&P 500, as measured by the CBOE Volatility Index (Exhibit 26) during the recent Credit
Crisis, was twice the highest level of the extremely volatile Dot-Com Bubble and subsequent correction.
The authors invested considerable time trying to find measures of market quality trends, including volatility,
specific to small- and micro-capitalization stocks. We could find no volatility indices, analogous to the CBOE
Volatility Index, that measure volatility in small- and micro-capitalization stocks. However, it is clear that the
market has become two-tiered and that exchange traded funds and the high-frequency trading community may
avoid small- and micro-capitalization stocks33 which has the effect of structurally diverting at least some
investment capital away from this sector.
Side box
Liquidity is best defined by Amivest (FactSet). It asks, “How much of this security can an investor buy or sell in a
defined period of time before that investor moves the security more than 1% in price?”
Various factors negatively impact liquidity, including:
32
“Liquidity” is a function of both volume and volatility. Liquidity is positively correlated to volume and negatively
correlated to volatility. A stock is said to be liquid if an investor can move a high volume without moving the price of
that stock materially. If the stock price moves in response to the purchase or sale of shares, the stock is said to be illiquid
and the higher price movement is evidence of higher stock price volatility.
33
Rogow, Geoffrey, “Small-Caps Are Missing Out On High-Frequency Trading Benefits,” Wall Street Journal Online,
September 16, 2009 ( http://online.wsj.com/article/SB125306075442314147.html)

x Small following among investors (need to find a buyer)
x Lack of capital commitment (someone, usually a market maker, standing ready to buy or sell when a
natural buyer or seller isn’t available)
x Cost to transact (commissions and spread)
x Lack of information flow (opaqueness)
x Information asymmetry (certain investors have higher or lower information than other investors)
x Fragmentation (investors buy and sell in multiple venues that are not linked and consolidated —
sometimes referenced as “The Balkanization of markets”)
We now have so many computers buying and selling stocks, one has to wonder if anyone remains — other than
management — to tell company stories to investors. This is an unintended consequence of the compensation-
crushing trifecta of:
x online brokerage (commission compression),
x order-handling rules and decimalization (spread compression), and
x best execution (legislated “cheapest” execution of trades as opposed to “best value for money”
execution).
Have the U.S. Stock Markets Served Investors Well?

The irony is that the U.S. stock markets, by creating structures that elevate trading interests, are becoming
increasingly less fair to fundamental investors
We have seen:
x The loss of an economic model that would allow the sell-side (Wall Street) to support broadly available
equity research growth of proprietary research (created by institutions for their own use), creating an
increasing chasm between institutional “haves” and small-institution and individual-investor “have nots”
x The loss of an economic model that would support critical mass amounts of high-quality research
coverage of small- and micro-capitalization stocks by either the sell-side (Wall Street) or the buy-side
(institutional investors)
x Increased numbers of high-frequency traders who may exacerbate volatility, use algorithms to decipher
and get in front of the order flow of other investors, and whose algorithms generally ignore the
fundamental investment value in stocks
x Market impediments that discourage companies from going public
x The potential for hedge funds to usher in an age of increasingly hard-to-detect market manipulation (as a
class, hedge funds are opaque compared to mutual funds and other entities reporting as part of the
Investment Company Act of 1940)
x Best intentions give rise to decreased liquidity, increased volatility and risk
The Great Delisting Machine has given us the exclusion of long-term investors, the decline in the listed market
for public companies, and the decline in the U.S. economy.
Copy this to a callout:

The need for improved stock markets has never been greater. Bridging the widening gap between small cap and
large cap issuer needs should be a national imperative.

6. Harm to the U.S. Economy
Management Productivity Drain
Recently, the founder of Integrity Research, a firm that tracks over 2,000 research providers, shared with us his
belief that, between firm consolidations and layoffs, 40% of sell-side research analysts lost their jobs in 2008.34
FactSet Research Systems recently reported, for the eight-and-a-half month period ended in May 2009, 2,200
cases of analysts formally dropping coverage of a company.35 More than one quarter (25.7%) of all sell-side
research reports on small cap companies announced that a sell-side analyst formally was dropping coverage of the
company.36 This is the continuation of a long trend: Studies have reported other declines in the research coverage
of small capitalization companies dating back to 2000.37
Repeat text as call out:

Dropped research coverage represented approximately 25% of all reports and was felt disproportionately by small
cap companies.
The net result is that productivity of public company managements is increasingly drained:
x Management must take over the burden of meeting with investors.
x Increased stock price volatility distracts employees.
x Investors may be unhappy and agitating for management change.
Loss of High-Quality Jobs

When companies are delisted from the exchanges, their ability to raise equity (and, often, debt capital) is
significantly impaired which in turn may cause these companies to shed jobs.
Similarly, when market structure stunts the number of companies going public, an opportunity for job creation is
lost for lack of access to equity (and debt capital) to fuel growth.
When one considers the steady growth in GDP in the U.S., the decline in the number of IPOs is all the more
striking. If the IPO market merely kept pace with GDP growth since 1996 (using 568 as the baseline, the average
number of IPOs from 1991 through 1996), we currently would have 798 IPOs per year —approximately the same
number we had in 1996, our peak year.
34
Conversations with Michael Mayhew, Chairman and Founder of Integrity Research.
35
Wall Street Journal article by Jeff D. Opdyke and Annelena Lobb entitled, “MIA Analysts Give Companies Worries,”
dated May 26, 2008.
36
Mayhew, Mike, “The Incredible Shrinking Research Coverage!”, Integrity Research Associates, June 1, 2009 Blog.
37
Taub, Stephen, CFO.com, “Analyst (Un)coverage Hurting Small Firms,” July 16, 2004.

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from those in body text (* or alpha or †)
Market Structure Depresses a
Broad Cross-Section of the U.S.
Economy
The ramifications of this structural
breakdown extend beyond venture
capital-backed companies. Data
from Professor Jay Rittera shows
the historical composition of the
IPO market (Exhibit 21).
a
Ritter, Jay. “Some Factoids About the 2008
IPO Market,” May 11, 2009. Excludes IPOs
below $5.00 per share, unit offers, ADRs,
closed-end funds, LPs, SPACs, REITs, banks
and S&Ls.
The IPO market serves all quarters

of American business. A full 47%
of all IPOs is neither venture
capital nor private equity funded.
Of this 47%, many businesses are
family owned and, in the current
market structure, simply can’t go
public. How many of these
businesses are forced to close or
face serious succession issues in the absence of a viable IPO market? The lack of a viable IPO market is thus
depressing a broad-cross section of the U.S. economy, not just the venture-capital industry.
In its “4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry,” released in April 2009, the
National Venture Capital Association stressed the critical connection between a healthy IPO market and job
creation, citing a study by Global Insight stating that 92% of job growth occurs after a company goes public.
We analyzed the Global Insight data and learned the following:

x The study captured 136 selected IPOs since 1970, including 25 since 1996, the peak year for U.S. IPOs.
x For each IPO, Global Insight listed employee headcount at IPO and in “latest year available” from public
filings.
x These 25 IPOs had median employee CAGR of 17.8% (we assumed conservatively that Global
Insight’s data for “headcount in latest year available” is drawn from 2008 data) and median employees
at IPO of 1,372.
We applied these numbers to the “lost IPOs” each year since 1997, defining “lost” as the difference between the
number of corporate IPOs in 1996 (peak) and the number of corporate IPOs in each year since 1996.
For example, in 1997:

x 569 IPOs, or 234 “lost” from the 1996 peak of 803 IPOs
x (234) x (1,372 employees growing at 17.8% for 11 years) = 1,946,113 potential jobs lost
We extrapolated that, at these rates, as many as 22 million jobs may have been “lost” since 1997 because of the
lack of IPOs. Note that this is a “gross” number before any related job losses or substitution. Though 22 million
may seem to be a staggering number on its own, we believe it is a reasonable estimate in the context of long-term
historical employment growth in this country.

In the 1970s, the U.S. had net employment growth of over 21 million jobs. Successive decades witnessed similar
levels: 18 million net jobs created in the 1980s and 17 million created in the 1990s.38 Note that much larger gross
employment growth numbers would have been required to support net employment growth at these levels.
In the 2000s, however, employment growth has fallen to approximately 5 million jobs. This decline in job
formation by the U.S. economy is coincident with the current age of Casino Capitalism, trading-oriented (as
opposed to investment-oriented) market structure, and the loss of the small IPO market feeder system.
38
U.S. Bureau of Labor Statistics

In Exhibit 22, each color band represents the progressive effect of “lost” IPOs on job growth potential. In fact,
the loss of 10 IPOs in 1997 translates into the potential loss of 83,167 jobs by 2008.
We evaluated different baseline numbers of IPOs, employees and job growth rates. Even at dramatically reduced
baseline assumptions, the results translate into several million jobs lost (Exhibit 23). For example, at just 568
IPOs per year (the pre-Bubble average), with 750 employees per company, growing at 10% annually, the results
still show that more than 4.4 million jobs may have been lost because of the absence of those IPOs.
Economists are calling increasingly for a jobless recovery out of the current recession.39 Thus, even at the low end
of our estimates, there is much to be gained by improving the state of our capital markets. It should be noted that
our estimates do not take into account incremental job growth that a vibrant IPO market would bring by:
x Reversing the trend of pension funds cutting allocations to venture capital

x Providing excitement and incentive for entrepreneurs to take entrepreneurial risk
x Providing more capital to small business from the reinvestment of capital returns from the IPO market
39
Gongloff, Mark, “The Job Market Needs to Hold Up Its End,” The Wall Street Journal, Sept. 4, 2009, p. C1.

This analysis may even understate the impact on jobs. For example, no attempt has been made to account for a
“multiplier effect” on job formation (Exhibit 24):
x when issuers go public and capital is freed up for reinvestment in private enterprise,
x when sales prices of private enterprises (M&A) increase and more money is made available to reinvest,
x when returns increase on small- and medium-enterprise investments, and
x when pension funds allocate more capital to small and medium enterprise.

Repeat copy for call out
Companies that secure public equity capital will invest it to support growth and development, which create jobs.
Notably, in the venture-funded industries that are more technology and health care oriented, the jobs are of a
higher quality — and the higher-quality jobs are disappearing.
To reiterate, this is not just an IPO problem. It is a severe dysfunction that affects the macroeconomy of the U.S.
and that has grave consequences for current and future generations.
x Companies that can secure public equity capital will invest that capital to support growth and
development, thereby creating jobs. Notably, the venture-funded industries are more technology and
health care oriented, and yield higher-quality jobs. In the context of our analysis, the higher-quality jobs
are disappearing.
x Once companies can secure public equity capital, they find it easier to attract credit. This combination of
equity attracting debt to fuel expansion likely further compounds the job formation effect.
x When shareholders sell their stock and receive cash — whether that cash goes to VCs, PE funds, or
Angel investors — equity capital is freed up for reinvestment in other, generally smaller, businesses. We
conclude, then, that the lack of an IPO market is curtailing investment in small to medium-sized private
businesses and impeding their already-limited access to credit (Exhibit 24).
Has too much damage been done?

Is the United States destined to years of lost opportunity because of its IPO and public company deficits? Is the
next generation left with an obstacle too large to overcome?
Even if we could fix market structure today and get back on track with 500 IPOs per year, has the foundation for
new jobs and new companies been so rocked that only a decade of gutting and restoring will position us for
rebuilding?

7. Recommended Solutions
We introduced a New Public Market proposal in our white paper, “Why are IPOs in the ICU?”. Feedback
subsequent to the publication of that paper leads us to believe the recommendations are on target and address the
fact that there are no longer economic incentives for market participants’ support of small capitalization stocks.
We have enhanced that proposal to reflect the feedback we received and have renamed that proposal,
“Alternative Public Market Segment”. The Private Market Enhancements are novel and have not been published
previously.
Yes, we can fix the U.S. stock market and drive growth.
We urge Congress and the SEC to hold immediate hearings to understand why the U.S. listed markets have shed
listings at a rate faster than any other developed market for which we have data.
We also urge them to pursue parallel solutions that, together with thoughtful oversight, will fix the “feeder
system” to the public markets that is so important to advance our economy, grow jobs, better serve consumers,
and reduce the deficit with no major expenditures by the U.S. government:
x Alternative Public Market Segment: A public market solution that provides an economic model that
supports the “value components” (research, sales and capital commitment) in the marketplace. It requires
a parallel market segment that leverages a fixed spread and commission structure.
x Enhancements to the Private Market: A private market solution that enables the creation of a
qualified investor marketplace — consisting of both institutional investors and large accredited investors
— that allows issuers to defer many of the costs of accessing private capital as a precursor to becoming a
public company. This market would serve as an important bridge to an IPO, notably in improving the
market for 144A PIPO (pre-IPO) transactions that require an issuer to list publicly in the future.
Alternative Public Market Segment

The United States needs an issuer and investor opt-in capital market that provides the same structure that served
the United States in good stead for so many years. This market would make use of full SEC oversight and
disclosure, and could be run as a separate segment of NYSE or NASDAQ, or as a new market entrant. It would
be:
x Opt-in/Freedom of Choice — Issuers would have the freedom to choose whether to list in the
alternative marketplace or in the traditional marketplace. Issuers could choose to move from their current
market segment into the alternative market segment (we suspect that many small companies would make
this selection, while large cap companies would not). Investors would have the freedom to buy and sell
stocks from either market. This is a “let-the-best-solution-win” approach that will re-grow the ecosystem
to support small cap stocks and IPOs.
x Public — Unlike the 144A market, this market would be open to all investors. Thus, brokerage accounts
and equity research could be processed to keep costs under control and to leverage currently available
infrastructure.
x Regulated — The market would be subject to the same SEC corporate disclosure, oversight and
enforcement as existing markets. However, market rules would be tailored to preserve the economics
necessary to support quality research, liquidity (capital commitment) and sales support, thus favoring
investors over high-frequency and day trading. Traditional public (SEC) reporting and oversight would be
in place, including Sarbanes-Oxley.

x Quote driven — The market would be a telephone market40 supported by market makers or specialists,
much like the markets of a decade ago. These individuals would commit capital and could not be
disintermediated by electronic communication networks (ECNs), which could not interact with the book.
x Minimum commissions and minimum quote increments (spreads) at 10 cents and 20 cents — 10
cents for stocks under $5.00 per share, and 20 cents for stocks $5.00 per share and greater, as opposed to
today’s penny spread market. The increments could be reviewed annually by the market and the SEC.
x Broker intermediated — Investors could not execute electronic trades in this market; buying stock
would require a call to a brokerage firm. Brokers once again would earn commissions and be incented to
phone and present stocks to potential investors.
x Research requirement — Firms making markets in these securities would be required to provide equity
research coverage that meets minimum standards, such as a thorough initial report, quarterly reports
(typically a minimum of 1-2 pages) and forecasts.
x Research permitted to work with banking — Research analysts would be permitted to work with
investment banking and be compensated on investment banking business, rather than being barred by
FINRA Rule 2711 and the Global Research Settlement.
Enhancements to the Private Market

The United States private (unregistered) equity markets need a complete overhaul in the form of an alternative
private marketplace. In their current state, they lack the liquidity and accessibility required to be meaningful for
the companies and investors who could and should be the active core of private capital formation.
Companies must be able to reach the broadest possible qualified investor base — both institutional and
accredited retail — so we must resist the temptation to raise the standard too high for accredited investors. The
status quo (144A market) has inherent hurdles that are insurmountable for all but the largest companies and
unattractive for all but the largest institutional investors.
The building blocks of this enhanced private marketplace include:
x Revitalize equity research – Research analysts should be permitted to work with investment banking
and to attend company meetings, rather than be subject to FINRA Rule 2711 and the Global Research
Analyst Settlement.
x Free companies to market their securities more broadly — We must create an environment that
better supports companies wishing to raise private equity capital. A necessary first step: create a safe
harbor for publicly marketing unregistered securities. Market participants often are paralyzed by the fear
that written materials for unregistered securities will fall into the hands of retail, non-accredited investors,
rendering the offerees illegal. Management mustn’t get mired in the process of the pitch; instead, it must
be free to focus on (and the law and SEC regulations should focus only on) the end game — the
investor.
Eliminate SEC or statutory restrictions on “general solicitation” or “general advertising,” provided the
ultimate purchasers are “qualified” investors. Permit companies and analysts to have media discussions of
company performance and news; permit companies to issue publicly their earnings releases and specific
offering-related news.
Finally, allow investment companies and ERISA accounts to invest a larger portion of their assets in
unregistered securities.
40The market would use electronic quotations to advertise indicative prices, but market makers (including “specialists”) would be left to
negotiate actual buys and sells.

x Overhaul verification of QIBs and accredited investors — The burden of verifying accreditation or
QIB status historically has been placed on issuers and broker-dealers, creating friction, cost, loss of
liquidity, and avoidance of these markets by potential market makers. Rather than requiring the company
or private placement agent to verify, shift the burden to the investor to self-qualify (subject to liability for
misstatements) for the new private placement market. Use an opt-in, check-box format whereby the
institution or individual declares that the investor in question meets qualifying criteria and either is
accredited or is a QIB (based on stated definition).
x Exempt companies from SEC registration — Permit holding of companies’ shares by an unlimited
number of qualified shareholders (eliminating the 500-shareholder and the 100-accredited-investor
limitations). Define “qualified” shareholders to include large accredited and institutional investors with no
SEC registration requirement under the Securities Exchange Act of 1934, but with appropriate disclosure.
x Self-regulate trading spreads — To attract capital and promote liquidity, this new market must create
and preserve economic incentive for its constituents. Allow the market to set minimum quoted spreads
and commissions.
To be clear, we are not advocating “Wild West” anarchy and imbalance of power (we know what can
happen when the economics are sucked out of a balanced system, e.g., public equity markets before
penny spreads). On the contrary, we propose a structured system with adequate economics to support
remarketing (through traditional research, salesmen and sales-traders) of smaller capitalization stocks that
otherwise would wither from inattention.
x Exempt market participants from holding period —Exempt new market participants from holding
period restrictions, and remove the obstacle requiring market participants to purchase unregistered
securities with “investment intent.” The “investment intent” requirement hinders the development of
private markets, and is unclear and at odds with the very notion of what a market participant is supposed
to do. Create a safe harbor for market participants to commit capital and create/preserve liquidity.
x Encourage centralized information, control and custody systems — Companies should seek out
marketplaces that provide systems to support the management and delivery of appropriate disclosure
information, and that facilitate the tracking and delivery of shares.
x Research permitted to work with banking – Research analysts would be permitted to work with
investment banking and be compensated on investment banking business, rather than be barred by
FINRA Rule 2711 and the Global Research Settlement.
The solutions outlined above cost nothing. All Sarbanes-Oxley and SEC enforcement regulations stay in force
to prevent fraud and to require internal controls. Public and private, they would lead to investment and growth in
the types of investment banks — the “ecosystem” — that once supported the IPO market in the United States
(e.g., Alex. Brown & Sons, Hambrecht & Quist, L.F. Rothschild & Company, Montgomery Securities, Robertson
Stephens), triggering rejuvenated investment activity, innovation, job growth, increased tax receipts and a lower
U.S. budget deficit.

Epilogue
Large populations of public small capitalization companies — missing now for most of the last decade — are
necessary to recreate the feeder system to sustain and grow listed markets, replenish capital into private markets,
drive job growth, and support the U.S. economy overall. However, there are tradeoffs. If we bring back
commission-based salesmen, we must expect higher rates of deceptive sales practices. Rates of fraud are likely to
increase. Consequently, the role of FINRA and the SEC — to ensure necessary supervision — will be critical.
The cost of such tradeoffs pales when compared to the returns to the average taxpayer of reinvigorated economic
growth, innovation, jobs and taxes. The cost also pales when compared to the much higher risks exposed in the
large cap area of the stock market. Consider this: Nearly doubling the size of our listed markets by adding 5,000
public companies, at a $100 million per company market value, represents $500 billion in aggregate value.
Nearly $1 trillion in value was lost when 29 of the largest financial firms collapsed from the stock markets
peak on October 7, 2007.41 Indeed, individual large cap companies have wreaked more havoc than the entire
population of small capitalization companies ever could — WorldCom had a value of $181 billion at its peak;
AIG had a value of $240 billion at its peak; Fannie Mae was at $90 billion; Global Crossing was at more than $80
billion; and Enron was at $66 billion.
Suffice it to say that Congress and the SEC would do U.S. taxpayers an enormous service by creating a capital
markets ecosystem that favors fundamental investing, discourages casino capitalism, and supports the small
capitalization feeder system that is essential to creating the industries and jobs of tomorrow — a system that
would not cost taxpayers a dime, but that would create jobs and tax revenues to restore the American Dream.
Today’s unknown innovator has the potential to be tomorrow’s global leader. The U.S. must enable the
next generation of small companies to access public markets, or it will continue to face the
consequences of America’s long-term global decline.
41
The New York Times, Sunday, September 13, 2009, “Financial Crisis, One Year Later” page 6, SundayBusiness.

APPENDIX 1 | Global Listing Trends (Indexed to 1997*)
Absolute Number of Listings vs. Listings per US$1 Billion in GDP
*peak year for U.S. listings



APPENDIX 2 | Innovators
Innovators42
The following is a list of entrants that are focused on the market opportunity in helping small
capitalization public and private companies. The fact that no dominant solution has yet to
emerge may be a sign of obstacles that require the attention of Congress and the regulators.
Company Approach Status

AIM (London Stock Market targeted at small-cap growth Launched in 1995. 2,900
Exchange’s Alternative companies internationally, with lower historical listings, 1,500
Investment Market) listing standards and regulatory burdens. current. £34 billion raised for
www.londonstockexchange.com issuers. Has targeted U.S.
companies with some success
to come to list in London.
Entrex TIGRCubs – Top Line Income Institutions have raised
www.entrex.net Generation Rights Certificates – novel capital earmarked for
security structure by which investors investment via TIGRCubs.
receive a fixed % of an issuer’s revenues Significant issuer interest, no
for a defined period. closed transactions
InsideVenture Private market platform connecting Launched in November
www.insideventure.com investors with pre-screened late stage 2008. Held debut conference
technology and health care candidates. in March 2009 featuring 50
Sponsored by leading VC firms. companies.
Knight Capital Leading source of off-exchange liquidity Trading more volume in U.S.
www.knight.com for U.S. equities. Other assets include equities than NYSE or
fixed income, foreign exchange and NASDAQ.
derivatives
PORTAL Alliance Open platform for trading and collecting NASDAQ’s PORTAL
www.portalalliancemarket.com information on privately placed 144A Market was spun off and
securities formed by NASDAQ and relaunched in November
leading investment banks 2008 as the PORTAL
Alliance
NYPPEX Private Markets Secondary private market advisory, Founded in 1998. Launched
www.nyppex.com execution, processing and research private market platform in
services. Focus on partnerships, private 2007. 465 secondary private
company securities and credit claims transactions to date.
NYSE Arca NYSE’s electronic exchange for small-cap Increased total addressable
www.nyse.com growth companies and ETFs. Designed as market to compete head to
a feeder to the big board. NYSE also head with NASDAQ.
acquired the American Stock Exchange. Despite growth in high
Combined, NYSE now can qualify most quality listed market venues,
of what qualified to list on NASDAQ. not reignited IPO market.
The Receivables Exchange Online auction marketplace for accounts Launched in November
www.receivablesxchange.com receivable, targeted at small and medium 2008. 200 customers. $7.5
sized businesses. Lenders are hedge funds, billion in listed invoices, $15
banks and asset-based lenders. billion in available capital.
42
Capital Markets Advisory Partners (www.cmapartners.com) and SecondMarket (www.secondmarket.com)
provided information for this exhibit.

APPENDIX 2 | Innovators
SecondMarket Centralized marketplace for multiple 3,000 participants. Over $1

www.secondmarket.com classes of illiquid assets, including auction- billion in notional value of
rate securities, bankruptcy claims, CDOs, assets traded. Winner of 2009
mortgage-backed securities, LP interests AlwaysOn East 100.
and private company securities.
SharesPost Building platform for trading private Business plan completed.
www.sharespost.com company shares. Founders include
founder of Brighthouse (incubator) and
Wilson Sonsini attorneys
TSX Venture Exchange Exchange headquartered just North of the Active in listing mostly
U.S. border in Canada that consolidated Canadian companies
the Vancouver Stock Exchange and has although some U.S.
attracted some listings from the United companies have chosen to
States. list dually in London and
Canada.

APPENDIX 3 | Alternative Public Offerings
Recent developments in the small and micro-cap capital markets world have paved the way for VC backed
companies to consider other alternatives to exit. One interesting option is the use of so-called “virgin shells.” In
contrast to a traditional reverse merger, where a company merges into the dormant remains of a failed public
company, virgin shell transactions (aka Form 10 Shells) are created from scratch. This type of transaction is less
expensive than a traditional reverse merger, and also removes the possibility of any unknown legacy liabilities
affecting a company once it merges into a dormant shell.43 It allows a company to start fresh. With the advent of
Form 10 Shells, the reverse merger transaction is now a great alternative for a smaller private company to go
public. Several innovative structures, created by groups such as Keating Capital of Denver, and WestPark Capital
in Los Angeles, take advantage of this virgin shell concept to bring small private companies directly to the public
markets without the use of an IPO.
However, more research needs to be done into the aftermarket support (or lack thereof) for these companies. To
date, the niche is not of the scale necessary to replace the shortfall in IPOs and the majority of reverse mergers
never make it to a listed market (they trade on the bulletin board). In addition, the same market structure
challenges that are causing small cap stocks to be delisted (lack of economics to support research, sales and
trading support) are challenges for small reverse mergers.
There is a case to be made that a closed alternative market that preserves the aftermarket economics (spread and
commissions) to pay for the value-components of aftermarket support (research, sales and capital commitment),
would be welcome by entrepreneurs and investors.
43
“Virgin Shells: Cleaner, Cheaper, Better?” The Reverse Merger Report, Second Quarter 2006.


Wake-Up Call For America

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A wake-up call for America:

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© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 1

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 2

Chapter 2. U.S. Markets in Crisis

Chapter 3. Faltering U.S. Stock Market

Chapter 4. U.S. vs. Other Developed Nations

Chapter 5. The Great Delisting Machine

Chapter 6. Harm to the U.S. Economy

Chapter 7. Recommended Solutions

1 - Global Listing Trends Indexed to 1997

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 3

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 4

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 5

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 6

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 7

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 8

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 9

 United States  Japan

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 10

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© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 11

 S&P 500 (United States)  Nikkei 225 (Japan)

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 12

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© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 15

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 16

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© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 18

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 19

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 20

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© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 22

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 23

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 24

The Great Delisting Machine

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 25

Products of the Great Delisting Machine

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 26

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 27

Hotel California (for small capitalization companies)

The “Brain Drain” of Equity Research

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 28

An Increasingly Hostile Environment

Volatility and thus Risk have Increased

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 29

Volatility May have Outpaced Liquidity32

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 30

Have the U.S. Stock Markets Served Investors Well?

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© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 31

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Loss of High-Quality Jobs

© Grant Thornton LLP and Capital Markets Advisory Partners LLC. 32

The IPO market serves all quarters

We analyzed the Global Insight data and learned the following:

For example, in 1997:

United States Japan

S&P 500 (United States) Nikkei 225 (Japan)

The “Brain Drain” of Equity Research